If the Fed cuts interest rates, it could affect your wallet

This week, interest rates are expected to fall for the first time in four years, but experts say this is unlikely to change anything fundamental.

When the Federal Reserve ends its meeting on Wednesday, almost all economists expect the Fed to cut its benchmark short-term interest rate. But whether the cut will be by a quarter or half a percentage point, from its 23-year high of 5.25% to 5.50%, is essentially a matter of luck.

In any case, consumers shouldn’t expect a big immediate difference, analysts say. When the Fed starts cutting its own interest rate, financial institutions typically are slow to lower the interest they charge borrowers but quick to cut the interest they pay on savings investments such as certificates of deposit and savings accounts.

“While lower interest rates are certainly a good thing for those struggling with debt, the truth is that this one rate cut isn’t going to make much of a difference for most people,” said Matt Schulz, a credit analyst at online marketplace LendingTree. “That doesn’t change the fact that the best thing people can do to lower their interest rates is to take matters into their own hands.”

Greg McBride, chief financial analyst at comparison portal Bankrate, said: “More significant will be the cumulative effect of a series of interest rate cuts over time.”

Will credit card interest rates fall?

Yes, interest rates would “almost certainly fall from their record highs in the coming months, (but) no one should expect dramatically lower credit card bills in the near future,” Schulz said.

For example, the average interest rate on new credit cards in September was 24.92%, unchanged from August and at its highest level since 2019, when LendingTree began tracking this data. If you have $5,000 in credit card debt at an APR of 24.92% and pay $250 per month, it will take you 27 months and $1,528 in interest to pay off the balance.

If the APR drops by a quarter of a percentage point to 24.67%, it will still take 27 months, but it will accrue $1,506 in interest to pay off the debt. That’s a savings of $22 over 27 months, or less than a dollar per month.
With a half-percentage point drop in the APR to 24.42%, it will take 26 months and $1,485 in interest to pay off your bill. That’s a savings of one month of repayment time and $43 in interest, or about $1.50 per month.

Daniel Milan, managing partner at consulting firm Cornerstone Financial Services, also said financial institutions would not necessarily tie their credit card annual percentage rates to the Fed’s actions.

“They tie their interest rates to their own risk,” Milan said. “If credit risk goes up – balances go up, defaults go up and savings go down – then we could see (Fed) rates go down and the APR go up or stay about the same because (the banks) are inputting different data.”

According to government data, credit card debt rose to a record $1.14 trillion between April and June, 9.1 percent of credit card balances matured last year and personal savings rates are near a two-year low.

Instead of relying on lower interest rates to pay off their credit card debt, experts say consumers should consider consolidating their debt with a 0% balance transfer credit card or a low-interest personal loan.

Are car loans becoming cheaper?

Interest rates on car loans are likely to fall, but a significant decline in interest rates is not expected, analysts said.

“A Fed rate cut wouldn’t necessarily drive all of those consumers back to car dealerships immediately, but it would certainly help get reluctant car shoppers back in the mood to buy,” says Jessica Caldwell, director of insights at car comparison site Edmunds.

According to an August Edmunds survey, 64% of car shoppers said a Fed rate cut would affect the timing of their next car purchase. However, vehicle costs are still significantly higher.

“Ultimately, buyers must first get a loan approval and then successfully make their monthly payments to keep their car,” says Jessica Caldwell, director of insights at Edmunds.

Will buying a home become more affordable?

Although mortgage rates are not set directly by the Fed, they generally follow the same pattern.

In the meantime, they will continue to fluctuate from week to week based on fluctuations in the bond market and inflation data that follow recent trends. Freddie Mac’s average 30-year fixed-rate mortgage rate was last at 6.20 percent, below the 7.22 percent average reported on May 2, despite the Fed holding rates steady.

The interest rate on 30-year fixed-term mortgages is likely to remain between 6 and 6.5 percent in the coming weeks and possibly fall below 6 percent, said Jacob Channel, chief economist at LendingTree.

“Nevertheless, mortgage rates remain relatively high compared to the last decade,” he said. “In addition, home prices remain at or near record highs in many areas.”

Jared Chase, financial advisor at Signature Estate & Investment Advisors, said, “Just because interest rates are going down doesn’t mean the list price is going down.”

What impact does this have on savers?

People who have accumulated stable, nearly risk-free money over decades thanks to high interest rates are likely to see a decline in savings and deposit returns almost immediately, experts say.

“Savings rates have already started to fall and will continue to do so, but there is no reason to panic,” Schulz said. “Yes, if you have not yet opened a high-interest savings account or secured a deposit insurance rate, you have probably already missed the interest rate peak. However, it may well be worth taking one of these steps now before rates fall even further.”

Even with lower interest rates on the horizon, “savers looking for the best deals will be well ahead of inflation for the foreseeable future,” said Greg McBride, chief financial analyst at comparison portal Bankrate.

If savers are hesitant to invest their money for the longer term, they can invest their money in high-quality dividend growth stocks instead, according to Daniel Milan, managing partner at advisory firm Cornerstone Financial Services.

“Dividend growth is key,” he said, recommending that companies increase their dividends by 7 to 10 percent annually to keep up with inflation.

Savings package: Where will the Fed end up with its interest rate decision? Find out where the economy stands here.

What will happen to the stock market?

The stock market has already risen in anticipation of lower interest rates. Lower interest rates usually boost stock prices because companies can borrow at lower costs to invest in and expand their business.

The broad Standard & Poor’s 500 index recorded its best week of the year last week and the blue-chip Dow index hit a record high during Monday’s trading session.

In the wake of the recent rally, investors have expanded their purchases. Instead of just buying the so-called “Magnificent Seven” stocks like Apple, Amazon, Alphabet, Meta, Tesla, Microsoft and Nvidia, they are snapping up high-quality dividend-paying stocks in the utilities, healthcare, real estate and consumer goods sectors, Milan said.

“This increased breadth since the beginning of July is good and healthy for the market,” he said.

Medora Lee is a finance, markets and financial reporter for USA TODAY. Reach her at [email protected] and subscribe to our free Daily Money newsletter, which provides financial tips and business news every Monday through Friday morning.

Will credit card interest rates fall?

Are car loans becoming cheaper?

Will buying a home become more affordable?

What impact does this have on savers?

What will happen to the stock market?

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